By Shawn A. Mesaros
BEIJING, Dec. 31 (Xinhuanet) -- The Federal Reserve recently announced the “dreaded” tapering of their Quantitative Easing Program and markets immediately rallied by 3 percent.
Market watchers may wonder, scratching their heads as to how this is possible.
Didn’t Bernanke’s May 2013 mention of “taper talk” cause markets to pull back over -6 percent and immediately send 10-year yields higher by almost 50 percent?
What’s different this time? The devil is in the details: When a taper isn’t really a taper.
An article published by John H Makin for the American Enterprise Institute says that the Fed’s actual purchase of debt paper amounted to an average 94 billion U.S. dollars a month through the year 2013, not 85 billion U.S. dollars.
He correctly has averred to the Fed’s ability to conduct back-door buying operations of all kinds.
Simply put, the Fed’s own statement on “tapering” revealed that they were (indeed) indicated additional easing, heretofore unadvertised, and through two alternative and “more effective channels” which already amount to around 9 billion U.S. dollars monthly Ñ aka “The No Taper Taper.”
With these options open to the “authorities” what is clear to us is that there’s no real desire to taper at all, and if need be, as we expect later in 2014/15, the Fed will likely have to INCREASE its purchase activity due to the persistent weakness around the world.
With the enormous amounts of money borrowed during this last economic drought, the Fed Ñ if history is any current and historic guide — will accelerate purchases of almost anything in order to avert the dreaded slowdown with so much more leverage in the system today than prior to the last near economic disaster.
The effectiveness of quantitative easing is a function of the dollars spent and what those people do with that money. Ray Dalio of Bridgewater Associates states: “If the dollars get spent on an asset that is very interchangeable with cash, then you don’t get much of an impact. You don’t get a multiplier from that.”
Simple and elegant: If the (QE) dollar is spent on an asset that’s risky and very different from cash, then that money goes into other assets and into the real economy. That’s really how you see (in our case you do not see) the “beneficial” impact of quantitative easing.
What do they buy? Who do they buy it from? What do those people do with that money?
QE is a deflation killer which helps governments get out of a deflationary trap ... which typically kills a bank balance sheet (collateral values drop, creating a fundamentally insolvent financial system) while citizens typically do what they are going to do either way. Deleverage.
When QE stops, deflation resumes due to continuous consumer desire to deleverage aka pay off debts. Nothing on the consumer landscape globally indicates that people either want or need more personal leverage.
With governments pressed hard to drive more growth, they have been pressed to artificially stimulate, and without material success at the consumer level.
When the government stops printing, the tide goes (back) out and alas ... naked swimmers are seen on beaches everywhere.
Until such forward thinking policy considerations are proved to exist, we are much bigger fans of adopting a decidedly lower risk investment policy with respect to risk assets.
We suggest that people move toward a more conservative investment posture in developed economies. Cash is likely King in the next several months.
These leveraged, slow moving elephant economies simply aren’t offering up enough big productivity levers to drive growth beyond our baseline scenario.
Shawn A. Mesaros is Managing Director of Pacific Asset Management. Shanghai Daily condensed the article.